Personal Finance: A job for now, an income for life

Easy though it is not to worry about financing our retirement, younger pensioners must now address the future.

GETTING EXCITED about annuities might seem like the ultimate contradiction in terms in personal finance circles, but next to seeing grandma's house sold to pay for care in a residential home, it is the prospect of having to exchange a personal pension policy for a small annual pension which stops when the owner dies, leaving nothing for the descendants, which stirs up most readers in the world of personal finance.

The Government is under pressure to provide retiring policy-holders with a better deal, not least to encourage the next generation to make a start with a penion plan as soon as possible, but Gordon Brown is notoriously tight with taxpayers' money, and any help is likely to come from the private sector. This month Norwich Union has launched a with-profits annuity which varies the pension according to the future performance of the stock market, and Merchant Investors is launching a unit-linked annuity which links annual payments to the underlying performance of the units in which the fund is invested.

The Norwich Union is not the first company to offer a with-profits annuity: Scottish Widows, for example, was there before them. The annual pension payment or annuity is based on the income from a mix of shares, fixed interest stocks, property and cash deposits, and benefits from the same kind of annual bonuses which are credited to standard endowment and with- profits policies.

It also allows the Norwich to offer two unique features; a guaranteed minimum annuity which provides a known floor, below which the annual payment will not fall even when the stock market is going through a bad patch. A surviving spouse can also elect to switch to a conventional annuity in order to provide a completely guaranteed annual income when the the first one has died. Merchant Investors is a more speculative deal which fluctuates with the value of units in the fund.

In both cases, the income over the long term should be greater than the yield on medium-to-long-dated government stocks, which is what determines conventional annuity rates. But it will inevitably start lower because of the low current yield on shares, and it will inevitably fluctuate with the performance of the share markets in future. They do also involve an annual management charge.

They are therefore more suitable for younger pensioners - especially those below the state retirement age who have already retired. In most cases they are by definition quite comfortably off and can afford to wait for long-term out-performance, and they probably still have some supplementary earning power.

New thinking from the private sector on annuities is both welcome and timely. Under current rules, the Government allows the policy-holder to take a quarter of the accumulated fund tax-free to do what he or she wants with, but the rest has to be used to buy an annual income for life.

If pensioners looked at an annuity as an insurance policy which guarantees them an income for life, it might stand a sporting chance of acceptance - if not exactly popularity. But the majority of pensioners see it as a one-way bet in which they first lose 75 per cent of their capital and, sooner or later, the income too.

They ignore the fact that money already invested in a pension fund has been growing steadily, and concentrate on the fact that the percentage pay-out on funds converted into a fixed-rate annuity has virtually halved over the past decade - to just under 9 per cent for a man of 65, and approximately 7 per cent for a woman of 60. Once bought, there is no return of capital and no increase in the annual payment.

Indexed linked annuities grow usually either in line with the retail price index or by 5 per cent, whichever is the less, but they start at around 60-65 per cent of a fixed annuity and take 13 years to catch up. In a perfect world, pensioners would like to get their hands on the capital in their fund to use as they see fit, but no government is going to risk pensioners spending the lot and then relying on the state support.

The best pensioners who want to keep their capital and still draw an income in retirement can do is opt for an income draw-down plan, which allows them to invest the capital from a pension plan and draw an income.

But the income cannot be greater than an annuity would pay, and at 75 it is compulsory to buy an annuity anyway. Income draw-down plans are also expensive to set up and nor are they considered cost-effective for sums under pounds 100,000.

What the public really needs is a CAT-marked draw-down option which requires the pension fund to be invested in a cheaply-managed, not too risky fund, from which the pensioner can draw the income while retaining the capital.

Start your day with The Independent, sign up for daily news emails
PROMOTED VIDEO
ebooks
ebooksA year of political gossip, levity and intrigue from the sharpest pen in Westminster
News
Buddy DeFranco
people
Arts and Entertainment
British actor Idris Elba is also a DJ and rapper who played Ibiza last summer
filmIdris Elba responds to James Bond rumours on Twitter
Arts and Entertainment
Lena Headey as Cersei Lannister in Game of Thrones
film
News
i100
Sport
Yaya Sanogo, Mats Hummels, Troy Deeney and Adnan Januzaj
footballMost Premier League sides are after a striker, but here's a full run down of the ins and outs that could happen over the next month
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Selby Jennings: VP/SVP Credit Quant- NY- Investment Bank

Not specified: Selby Jennings: VP/SVP Credit Quant Top tier investment bank i...

Selby Jennings: Quantitative Research | Equity | New York

Not specified: Selby Jennings: Quantitative Research | Global Equity | New Yor...

Selby Jennings: SVP Model Validation

Not specified: Selby Jennings: SVP Model Validation This top tiered investment...

Selby Jennings: Oil Operations

Highly Competitive: Selby Jennings: Our client, a leading European Oil trading...

Day In a Page

Ed Richards: Parting view of Ofcom chief. . . we hate jokes on the disabled

Ed Richards: Parting view of Ofcom chief. . . we hate jokes on the disabled

Bad language once got TV viewers irate, inciting calls to broadcasting switchboards. But now there is a worse offender, says retiring head of the media watchdog
War with Isis: The West needs more than a White Knight

The West needs more than a White Knight

Despite billions spent on weapons, the US has not been able to counter Isis's gruesome tactics, says Patrick Cockburn
Return to Helmand: Private Davey Graham recalls the day he was shot by the Taliban

'The day I was shot by the Taliban'

Private Davey Graham was shot five times during an ambush in 2007 - it was the first, controversial photograph to show the dangers our soldiers faced in Helmand province
Revealed: the best and worst airlines for delays

Revealed: the best and worst airlines for delays

Many flyers are failing to claim compensation to which they are entitled, a new survey has found
The stories that defined 2014: From the Scottish independence referendum to the Ice Bucket Challenge, our writers voice their opinions

The stories that defined 2014

From the Scottish independence referendum to the Ice Bucket Challenge, our writers voice their opinions
Stoke-on-Trent becomes first British city to be classified as 'disaster resilient' by the United Nations

Disaster looming? Now you know where to head...

Which British city has become the first to be awarded special 'resilience' status by the UN?
Finally, a diet that works: Californian pastor's wildly popular Daniel Plan has seen his congregation greatly reduced

Finally, a diet that works

Californian pastor's wildly popular Daniel Plan has seen his congregation greatly reduced
Say it with... lyrics: The power of song was never greater, according to our internet searches

Say it with... lyrics

The power of song was never greater, according to our internet searches
Professor Danielle George: On a mission to bring back the art of 'thinkering'

The joys of 'thinkering'

Professor Danielle George on why we have to nurture tomorrow's scientists today
Monique Roffey: The author on father figures, the nation's narcissism and New Year reflections

Monique Roffey interview

The author on father figures, the nation's narcissism and New Year reflections
Introducing my anti-heroes of 2014

Introducing my anti-heroes of 2014

Their outrageousness and originality makes the world a bit more interesting, says Ellen E Jones
DJ Taylor: Good taste? It's all a matter of timing...

Good taste? It's all a matter of timing...

It has been hard to form generally accepted cultural standards since the middle of the 19th century – and the disintegration is only going to accelerate, says DJ Taylor
Olivia Jacobs & Ben Caplan: 'Ben thought the play was called 'Christian Love'. It was 'Christie in Love' - about a necrophiliac serial killer'

How we met

Olivia Jacobs and Ben Caplan
Bill Granger recipes: Our chef's breakfasts will revitalise you in time for the New Year

Bill Granger's healthy breakfasts

Our chef's healthy recipes are perfect if you've overindulged during the festive season
Transfer guide: From Arsenal to West Ham - what does your club need in the January transfer window?

Who does your club need in the transfer window?

Most Premier League sides are after a striker, but here's a full run down of the ins and outs that could happen over the next month